Dr. Todd Mei
[A note from David Utsler: I am pleased to welcome Dr. Todd Mei to Discursive Dialectics with a guest post on this timely and interesting topic. Dr. Mei is a public philosopher, business consultant, and podcaster. See the links at the bottom of this post to learn more about him and his work.]
The word “blockchain” tends to elicit two reactions:
- Excitement for those who are keen to see how the putative next phase of the technological revolution will pan out according to a decentralized ledger system (a.k.a. Web 3.0).
- Bothered Reluctance for those who are tired of hearing about the promises and enthusiasm generated by cryptopunks and cryptocurrencies.
Before you decide where to hang your hat (if you have not already done so), there are a few important things to bear in mind when trying to get a better grip on the promises and pitfalls of blockchain technology.
This blog will cover a few of the essentials in order to provide the reader with a better sense of the current landscape and whether one might want to live one’s present and future lives by embracing the blockchain or just taking a “wait and see” approach.
The Basics of Blockchain
The blockchain is essentially a digital ledger or record of transactions that is permanent, un-alterable, and public. Its public feature includes two noteworthy items.
- On the one hand, its record is transparent and made available to the public (with certain privacy guards in place).
- On the other hand, its public nature means that no central authority has governance over it. For example, instead of being stored on servers owned by a corporation, the blockchain is stored on the computers and systems, or nodes, that send, receive, and validate information via the blockchain.
What’s So Good about Blockchain Technology?
As public and un-alterable, any transaction is available to confirm by those interested in doing so. The ledger is essentially a series of connected snapshots (or “blocks”) of activities undertaken by people, much in the same way that cameras might keep a record of what people do in the public sphere. But instead of recording the public lives of people, it records people when they engage in activities that the blockchain facilitates.
What kind of activities might these be? Most of us are familiar with the idea of buying Bitcoin, where someone can send Bitcoin through a digital wallet to another person to the recipient’s public digital address. But there’s more to blockchain than just buying Bitcoin.
Activities can also include those made available through companies or a conglomeration of interested people (e.g. DAOs, or Decentralized Autonomous Organizations) who want to fund certain services and products—anything from financial exchange to pizza! (I’ll come back to pizza in a moment.)
One way of seeing the benefit of this public ledger: businesses and people conducting financial transactions via a blockchain cannot hide what they do. If the blockchain existed in the late 1990s (and was widely used), a company like Enron would not been able to “cook the books” when it manipulated the value of its holdings based on an appraisal system called Mark-to-Market. (Illicit activity that uses the blockchain to fund crime or terrorism is distinct issue.)
One main reason why businesses and people would want to use a blockchain for financial services boils down to what its decentralized structure offers—namely, removing the middleman who makes money from providing such services.
Think of any service you use—Paypal, SWIFT, Zelle (for merhcants), Ebay, and of course banks. Imagine there being no transaction fees when using them. Instead of middleman organizations providing services, financial transactions would be provided via a decentralized platform (such as liquidity pools). This decentralized system is called DeFi (decentralized Finance) where, as Arun Padmanabhan explains, its
platforms are structured to become independent from their developers and backers over time and to ultimately be governed by a community of users whose power comes from holding the protocol’s tokens.
There are DeFi platforms, for example, that allow users to trade currencies without transaction costs. Indeed, one of the rallying cries of DeFi is doing away with monopolistic-like control over products and services in order to allow for a more community-focused and community-run system. Remember the example of buying pizza via the blockchain mentioned above? Consider what the founder of the first blockchain pizza organization stated:
“Bitcoin Pizza is the first decentralized pizza brand uniting our favorite neighborhood pizzerias under one roof to take on Big Pizza.”
But Does this Really Matter to Me?
There are at least three ways of thinking about this question.
1. One is to consider how often your daily life is affected by the transaction fees claimed by middleman services. Many of us have limited exposure to such fees except on occasions when one needs to pay for something where the vendor does not accept more conventional forms of payment. In fact, we tend to think of such fees as natural to how things work. Banks need to make money, and charging fees for their service is one way of doing this. But does it have to be this way? . . . and should it?
2. Enter a second, and perhaps more far-reaching, consideration: Has the overall cost of transactions fees within an economy “artificially” raised the cost of doing our everyday activities?
Ever heard of discount rates, operating fees, and interchange fees? These are the costs that businesses pay to credit card issuers for their services. They add up quickly and substantially; and any business owner will come to see that to prevent such fees from eating into profits, they should be built into the costs of business. At the risk of being repetitive—imagine a DeFi financial system without these costs.
3. Finally, another consideration: If the blockchain can prevent bad financial practice, is that really a benefit to me?
When bad financial practices are widespread or substantial enough, they can influence the economy itself. If the blockchain ledger system were around in 2008, would it have prevented the housing crash? There are good reasons to think it would have. Justin Lacche speculates,
Blockchain, integrated directly into mortgage contract agreements, would have provided the metadata that with the correct, investor-friendly reporting, would have shown folks that these wonderfully-rated, and seemingly can’t miss investments, were based on millions of people who understandably wanted the American dream, but were in no position to make the next monthly payment the second their variable mortgage rates tripled.
But, of course, what blockchain technology promises in terms of decentralized finance may be too good to be true. Before we examine this dilemma, let’s first address a rather large elephant in blockchain technology.
How Do Cryptocurrencies Relate to the Blockchain?
The short answer is that when Bitcoin first emerged it was purely a speculative commodity. People were investing in Bitcoin because it was a product of the blockchain, and its limited supply also incentivized its speculative value, much in the same way many pyramid schemes work—get on the pyramid early to sell the goods at a higher return to those trying to get on the pyramid (after you).
However, with the emergence of Ethereum, the relation of cryptocurrencies to the blockchain have reversed. Cryptocurrency influencer, Sebastian Purcell, puts this well:
[Ethereum] was the first platform coin in the world—literally reversing the idea of Bitcoin. Rather than have blockchain power a coin [as with Bitcoin], make the coin power a blockchain. That way, the blockchain is freed up to run other applications on top of it.
Call this the crypto transition.
In other words, buying a cryptocurrency today is largely a way to fund and invest in projects. Ethereum is hoping to realize the promise of a decentralized network that can reach a certain transaction processing benchmark. And there are many more projects (DAOs) of a smaller nature that one can find and consider for investment.
In short, now cryptocurrencies are largely the way to invest in projects using the blockchain. It’s the equivalent of getting involved with a company’ stocks when they have an Initial Public Offering, it’s just that the platform is decentralized and is therefore an Initial Decentralized Offering.
“Meet the new boss, same as the old boss”
There are at least two worries about the blockchain and whether it can be a success.
Execution
In order for a decentralized system to be efficient and workable on a large scale, it needs to have a robust processing speed (transactions per second). Other problems involve security and the impact on the environment, which the standard verification process (i.e. proof of work) notoriously affects. Ethereum, for example, is far off from meeting these goals. Is it even possible? You can read more here.
Takeover
One can imagine governments or corporations finding ways to regulate and control blockchains to the point that its democratic promise of decentralization is co-opted and slowly morphed into more of the same—i.e. big business, monopoly-like control, unethical use of private information.
Or the blockchain project can be made obsolete by virtue of being out-competed by other digital (i.e. non-crytpo) currencies. (Better technology does not always win out.) While a cryptocurrency is digital, a digital currency need not use the blockchain and cryptographic technology. It can instead act as a store of value and as a store of information for a central authority in order to gain better control over markets and individual behavior. Imagine, for example, such an authority tracking your spending behavior or even coding digital currency so that it can only be spent on certain items by a certain deadline.
It brings to mind a new inflection and meaning to the marketing tagline, “What’s in your wallet?”
I think this question will become more prominent in the next five to ten years as questions about the blockchain will be answered.
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About Me
Todd Mei is former Associate Professor of Philosophy (University of Kent) who specializes in the philosophy of work, ethics, and classical economic theory. He is now a consultant for businesses and is a podcaster for Living Philosophy, a public series exploring ideas about life and the inspiring second-lives of people.
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